De-Mystifying Crowdfunding
Over the last few years we have all been witness to something extraordinary. We have watched the world order turn on its head. The economic superpowers have swapped roles. Our governments are struggling to finance their own public debt and now public spending cuts are reaching to the deepest parts of our society. In spite of all of this gloom, I am supremely optimistic.
We have the internet.
Forget the invention of the wheel, forget steam power, forget even electricity. We have access to information instantly. The advent of search engines allowed us to find more information that any library could ever hold and do so without even bothering another person for a reference number. Online credit card processing allowed for virtual purchasing to become a reality without the need for a broker at the other end of the line. Not even the great Adam Smith could have foreseen so many individuals trawling an online world trading in a seamless low transaction cost world, benefiting simply by pursuing their own self interests.
We have barely scratched the surface.
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Your fundraising friend PleaseFund.Us
Against a backdrop of the following online trends: greater trust; more usability; faster, cheaper transactions; more information; greater standardisation; enhanced social networking, some things have now been made possible. Our banks have all allowed online banking, our credit companies allow us to make purchases online, our Government tells us whether we should travel to a country or not through their website.
What else has been made possible by the internet? Funding Ideas, or to be more precise a greater funding of a greater number of ideas. Traditional methods of funding could help great ideas get the funding that they needed, but now we are entering a new phase where you don't need to be a bank manager's best friend to get some funding. You don't need to have a wealthy relative willing to throw some money your way. You need to be able to explain your idea in a way that will appeal to the worldwide online community!
One of the most difficult decisions any idea owner will have to face is working out how to finance making their idea a reality. Options for raising money vary from self funding, approaching a bank for a loan, seeking investment through finance houses or applying to grant giving bodies. But why not just give people a chance to buy into your idea? Why not just let people have a look at what you want to do and decide for themselves if it is a good plan. The internet allows us to put content online, get thousands of people to look at it and even capture their feedback. Surely, armed with these capabilities we could find a way to help people get funding for ideas. Step up to the plate...... crowdfunding platforms.
Micro-finance... no strings attached?
We needed to find a model that works in today's circumstances. We needed to find a model where people could support a great idea without risking too much. We needed to reduce the barriers to getting finance to simply being a standardised format that people could trust, understand, interact with cheaply and receive the benefit of knowing others are supporting in the same way (Keynesian economics refers to animal spirits, we thought it could be as simple as safety in numbers).
Traditional fundraising methods often involve creating a business plan. There are business schools out there, helping people learn how to create brilliant business plans. The fact that almost everyone has written a business plan is testament to the fact that some form of agreement is out there on what you should write if you are looking to finance your company. For online funding to work, people needed to have a standardised format through which to invest/back/support ideas. The process of allowing thousands of people to look at your idea and decide based upon the information that you have given them (and quite often no more than that) to support your idea through financial pledges has allowed great ideas to start getting funded.
What PleaseFund.Us and a host of other crowdfunding sites have done is make it easy, reliable, standardised and interesting for the people that want to support. What all of the crowdfunding platforms have also done is to remove the gatekeepers from the fundraising process. If you have a great idea, you don't need to impress your bank manager to get the money, you don't need to beg your wealthy Aunt to help you get started, you simply have to persuade thousands of people to chip in. If the masses like your idea then you will get the funding.
The crowdfunding platforms that have proven to be the most successful have all taken a few key points and made them core to their funding process. Project owners need to explain their project, they need to set a funding deadline date, they need to have a funding target that they need to reach, they need to offer something back in return for people giving them money. It is this final part of the puzzle that has created such a stir! Project owners need to give something back in return for the financial support. In the US (up until very recently), project owners were not allowed to offer equity in return for investment into their company/idea/project. So companies such as Kickstarter and Indiegogo pushed project owners to reward backers with project based pledge rewards. In effect supporters of an idea are pledging money to receive an item relating to the project once the idea has become a reality.
The smart bit has to be to standardise this whole process so that thousands of internet users feel confident enough in the platforms and the project owners that they will part with small amounts of cash in the knowledge that they are going to have to wait until the project has been completed before receiving anything. By opening up ideas to the crowd, projects that previously could only dream of being financed are being funded within days. Thousands of internet users are trawling crowdfunding sites every days looking for new ideas, new rewards, new bargains, chasing down their own self interested goal and in the case of crowdfunding it is to the enormous benefit of the creative arts!
But why does the model work so well
The secret to the crowdfunding model working so well is self interest! Project owners are incentivised to drive all of their network to view their project up on the crowdfunding platform. Platform owners are incentivised to promote every project that is up on their platform to encourage more projects to come and use their platform. Normal, every day users are incentivised to hunt down bargains, one offs, unique experiences and importantly new products, ideas, innovations that have never been seen before. The bigger it gets, the better it gets. If five theatre productions have gone for funding on one platform, the next play that goes for funding on the platform has the benefit of tapping into all the previous theatregoers already in the community.
People start to cross pollinate other people's projects. You may have been drawn onto a crowdfunding site because one of your close friends is trying to raise money for their brilliant project and whilst browsing the site found yourself making a pledge to a project that has nothing to do with your original reason for visiting the site. On average nearly 10% of people come back and make further pledges on crowdfunding sites. This figure is only going to rise in time as confidence grows in the model.
There is no set limit to what can be crowdfunded. Our experience has been that if someone can post a project with good rewards and drive a relevant crowd to look at their idea, they will have every chance of getting their idea funded.
What does the future hold?
Don't be surprised to see a standardised equity crowdfunding model appear on the horizon. Already a couple of companies have worked out the intricacies of the laws to allow thousands of people to pledge in return for equity stakes in companies.
Could we see a crowdfunding company that offers debt, equity and mezzanine financing as well as pledge rewards? Sure, what is to stop it all coming together and a crowdfunding platform offering all kinds of funding that you might need!
About the author: James Bailey is the founder of www.PleaseFund.Us, the UK's leading crowdfunding platform for creative ideas. He is an expert in online social media and has worked in marketing for various companies including Dunnhumby.
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